An Antigua Gambling Model for the International Tax Regime

The international tax world is facing a defining moment. While there is little agreement on anything else within the field, there appears to be a wide and deep consensus that the modern international tax regime—the so-called flawed miracle emerging from World War II—is irrevocably broken. Rich countries, poor countries, multinational institutions, scholars, and politicians all seem to agree the time is now to revisit the international tax regime and rebuild it from the ground up. Leading the way is the Organization for Economic Cooperation and Development (OECD) through its Base Erosion and Profit Shifting (BEPS) project, which promises to adopt common international principles to prevent multinational taxpayers from using techniques that cause their income to fall through the cracks without any country able to meaningfully tax it. But the BEPS project, as well as all similar efforts, faces the formidable task of building a consensus without the infrastructure of a new institutional framework for international taxation. Of course, the task of developing an entirely new institutional framework for international tax is a major and daunting one. Rather than address the enormity of this entire project, this Essay will focus on one aspect that has received less attention as of late: even if a consensus around new rules can be universally agreed to, what happens when countries break the rules? This Essay briefly describes the Antigua Gambling dispute and the resolution adopted by the Dispute Settlement Body of the WTO. Then, this Essay briefly describes the state of the modern debate over BEPS and similar projects. This Essay uses Antigua Gambling as a thought experiment of how to build dispute resolution mechanisms for international tax, proposing several potential alternative models that could be adopted

Defining a Country\u27s Fair Share of Taxes

The international tax regime is facing a defining moment. As stories of multinational companies expatriating and shifting income around the world with seeming impunity continue to emerge, the question of how to divide the international tax base among the countries of the world increasingly draws attention from policy-makers and academics. To date, however, the debate has tended to devolve into one over the two traditional tools used to divide worldwide tax base—transfer pricing and formulary apportionment. This Article demonstrates that such focus is misplaced on the instruments of dividing the worldwide tax base rather than on first principles. Instead, this Article will adopt the first principle of maximizing the efficiency of the worldwide tax regime under two key, but realistic, assumptions: first, that the presence of multiple states in the world is efficient and, second, that there is a declining marginal utility to public goods. Under these assumptions, dividing worldwide tax base efficiently requires balancing the goals of maximizing the neutrality of tax laws and the provision of public goods across all countries. Based on this result, this Article explains how the modern debate has inappropriately focused on how to capture tax base or prevent corporations from shifting income across jurisdictions rather than how to build a new international tax regime for the modern international order. The Article then demonstrates that the traditional approaches to international tax will be inefficient under the stated assumptions. Instead, this Article will propose a hybrid regime in which each country is entitled to tax a portion of worldwide tax base based on that country’s amenities and then the relevant countries will divide the remaining common tax base among themselves so as to maximize the return to worldwide public goods. By taking into account both capital flows and public goods provisions in this manner, the efficiency of the international tax regime can truly be maximized

Not All Carried Interests Are Created Equa

Recently, a significant debate over the taxation of so-called carried interest in private equity funds has received much attention from scholars, the government, commentators, and the media. This debate has focused on whether private equity fund managers who earn a percentage of the returns generated by the fund should be entitled to preferential capital gain treatment on such returns. The primary concern in this debate revolves around whether managers are effectively being compensated for services normally taxed at higher rates while receiving the benefit of preferential rates reserved for capital gains. Proponents of reform point to the services being performed by the managers, while proponents of the current system point to the investment exposure to the underlying assets of the fund. In reality, however, both sides are partially correct: carried interest is blended in that it represents both a return to services and a return on capital. Since carried interest is blended in this manner, an analogy to either proves less than satisfying. The issue of blended labor/investment returns is not new to the tax laws, however. Historically, one way the law has attempted to address the issue was not by deconstructing such returns into constituent parts, but instead by imposing a holding period requirement. Under this approach, not all capital investments are created equal; rather, only capital investments held for an arbitrary period of time while bearing the risk of loss qualify for preferential rates. The current debate over the taxation of carried interest in private equity has failed to incorporate this element into the analysis, i.e., the role that holding period plays in denying preferential rates to blended labor/investment returns, such as carried interest. This Article will do so, concluding that, to the extent any reform of the taxation of carried interest within the existing framework of the income tax is appropriate, a better approach may be through the application of the holding period rules rather than through current proposals to either change the definition of capital gains or further complicate the partnership tax rules

Carving a Path for Legal Scholarship during an Existential Crisis

The G-7 and G-20 recently announced a “breakthrough” agreement by over 130 countries to adopt and implement a “global minimum tax” proposal. The agreement is reportedly expected to raise over $150 billion in new revenue by closing some of the most notorious tax loopholes in the world; ultimately the deal could reshape global commerce and shore-up beleaguered national finances following the global pandemic. Officials involved in the deal have been quoted as making sweeping statements that the deal was historic, and that it would reshape the global economy, make worldwide taxation fairer, eliminate incentives for corporations to avoid tax, and serve as a clear signal for global justice

Source as a Solution to Residence

The choice between source-based and residence-based taxation has defined the terms of the debate for the international tax regime since its inception in the early 1900s. As an economic matter, residence taxation has generally been considered superior to source taxation. Recently, however, source taxation has begun to receive increasing support from both policy-makers and academics alike, especially as the concept of residence has come under attack as losing any significance in the modern, globalized world. Regardless of one’s preference in this debate, the terms of the debate seem to be set—source versus residence as two opposing poles for all purposes. The thesis of this Article is that the construct of source and residence as two competing and irreconcilable doctrines is largely incorrect as a legal matter. Rather, both source rules and residence rules can and should be thought of solely as instrumental tools to divide taxing authority in a globalized world with mobile capital. Under this approach, there is no reason why “source” rules as a doctrinal matter need to be used only for “source” taxation as an economic matter, or that “residence” rules as a doctrinal matter need be used for “residence” taxation as an economic matter. Instead, the source rules as a doctrinal matter can actually be used to solve the problems of the residence rules as a doctrinal matter. Put differently, source and residence as doctrinal rules can converge into a single concept in the modern global economy. If it is true that residence as a conceptual matter has become increasingly meaningless in the globalized world, tying the doctrinal rules of residence to the doctrinal rules for source can better effectuate the ultimate goals of the international tax regime. This Article introduces a proposal to define the residence of entities as domestic for purposes of US tax law based on the source of the income of such entities. In its most simplistic form – an entity would be a US Person if it earns over a threshold amount of US Source income. Of course, such an approach would prove more complex than such a simple statement, but the basic premise holds. The Article then demonstrates how such an approach could be used to resolve two of the most difficult and pressing issues confronting the modern US international tax regime: corporate inversions and offshore hedge funds

Not All Carried Interests Are Created Equa

Recently, a significant debate over the taxation of so-called carried interest in private equity funds has received much attention from scholars, the government, commentators, and the media. This debate has focused on whether private equity fund managers who earn a percentage of the returns generated by the fund should be entitled to preferential capital gain treatment on such returns. The primary concern in this debate revolves around whether managers are effectively being compensated for services normally taxed at higher rates while receiving the benefit of preferential rates reserved for capital gains. Proponents of reform point to the services being performed by the managers, while proponents of the current system point to the investment exposure to the underlying assets of the fund. In reality, however, both sides are partially correct: carried interest is blended in that it represents both a return to services and a return on capital. Since carried interest is blended in this manner, an analogy to either proves less than satisfying. The issue of blended labor/investment returns is not new to the tax laws, however. Historically, one way the law has attempted to address the issue was not by deconstructing such returns into constituent parts, but instead by imposing a holding period requirement. Under this approach, not all capital investments are created equal; rather, only capital investments held for an arbitrary period of time while bearing the risk of loss qualify for preferential rates. The current debate over the taxation of carried interest in private equity has failed to incorporate this element into the analysis, i.e., the role that holding period plays in denying preferential rates to blended labor/investment returns, such as carried interest. This Article will do so, concluding that, to the extent any reform of the taxation of carried interest within the existing framework of the income tax is appropriate, a better approach may be through the application of the holding period rules rather than through current proposals to either change the definition of capital gains or further complicate the partnership tax rules

“Thinking Outside the (Tax) Treaty” Revisited

The rise and development of “Base Erosion and Profit Shifting” project by the Organization for Economic Cooperation and Development (BEPS) provides an ideal opportunity to revisit the fundamental principles underlying the international tax regime and the bilateral tax treaty regime in particular. This is true because BEPS represents both an attempt to create a new, truly multinational consensus on international tax matters and a clear move away from the bilateral tax treaty as the primary form of international coordination. From this perspective, BEPS provides the perfect opportunity to revisit the role of a proposed dispute resolution mechanism for nontreaty member countries, an idea proposed in the article Thinking Outside the (Tax) Treaty. (“Thinking”). The ultimate lesson of Thinking—that increasing cooperation of the least cooperative states in the world is as important, if not more important, to the ultimate success of the international tax regime—remains not only true post-BEPS but potentially crucial to the long-term success of BEPS. For these reasons, a nontreaty-based dispute resolution mechanism—whether housed in the OECD, the WTO, or otherwise—should be considered as a fundamental part of any institutional framework in a post-BEPS world